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Keeping Pace With Regional Gasoline Prices

Subsidies are intended to protect consumers by keeping prices low. But they also come at a high cost as they are expensive for governments -- and therefore taxpayers -- to finance and can hinder governments’ efforts to reduce budget deficits and directly support the poor. They also compete with other priority public spending on roads, schools, and healthcare.

Subsidy reforms in oil exporting countries is proceeding slowly, and in many of them there is not yet a sense of urgency for reforms. In recent years, however, Iran has undertaken a comprehensive subsidy reform plan.

Iran’s plan to cut subsidies offered for energy carriers remains one of the most difficult tasks for the government to manage, as reforms would have inflationary impacts. Reforms were primarily aimed at removing implicit subsidies on energy carriers, and then on many other products or services. The government seeks to gradually raise prices of energy carriers, especially of gasoline, to international levels over a five-year period.

In 2007, the government started issuing electronic fuel cards just to systematically control rising consumption of fuel in the country. In December 2010, when the government eventually decided to implement the first phase of subsidy reforms, it offered vehicle owners gasoline quotas for each month. The subsidized price of rationed gasoline has increased since then, but still remains well below international prices. Vehicle owners have been allowed to purchase extra fuel at higher prices. But even these prices have still been lower than international prices.

In 2010, the subsidized price for gasoline was set at 1,000 rials and the free price at 4,000. The subsidized price was then raised to 4,000 rials in mid-2012, and the free price to 7,000 rials. The subsidized and free market prices were for the third time raised in April 2014 to 7,000 and 10,000 rials respectively.

The subsidy reform plan was initially sought to raise fuel prices to about 90% of the Persian Gulf FOB price by the end of 2015. Before the recent fall in oil prices, the gap was wide between the gasoline price in Iran and that in regional countries, leading to the smuggling of gasoline to neighboring nations like Iraq, Turkey and Pakistan.

The record decline in oil prices has recently triggered a hot debate among economists in Iran that it's time for the government to abruptly cut energy subsides, with international companies predicting further fall in oil prices to as low as $40 per barrel from about $45 now.

Experts argue that the record decline in global fuel prices has provided a unique chance for the Iranian government to launch a floating energy price system, like in regional countries, to set the price in the dollar (the main foreign exchange rate used in Iran) and in accordance with the international oil market. The prices, experts suggest, can be set on a weekly or monthly basis. If the reform plan is implemented now, the inflationary impact would be little as gasoline prices in regional or international countries are already at record lows, and very close to that in Iran.